Asked by Yania Isabel Romero on Jul 12, 2024
Verified
Hold-up problems usually occur when
A) One of the parties makes a heavy investment in equipment specific to its trading partner
B) One of the firms decides to invest heavily in general purpose equipment
C) Costs are avoidable
D) Costs are incurred
Hold-Up Problems
Situations where one party in a negotiation exploits their bargaining advantage at the expense of others, often after a mutual investment or commitment is made.
Equipment Specific
Pertaining to or designed for particular pieces of equipment, often implying specialized usage or requirements.
Trading Partner
A trading partner is an entity such as a company, organization, or government with which another entity engages in the exchange of goods, services, or information.
- Understand and apply the concept of hold-up problems and their solutions in business operations.
Verified Answer
TD
Thaís DutraJul 15, 2024
Final Answer :
A
Explanation :
Hold-up problems arise when one party invests heavily in equipment that is specific to its trading partner. This is because the other party may use their position to extract more favorable terms in the future, knowing that the first party has already sunk significant costs into the relationship. Option B is incorrect because investing in general purpose equipment does not necessarily create a hold-up problem. Options C and D are irrelevant to the definition of hold-up problems.
Learning Objectives
- Understand and apply the concept of hold-up problems and their solutions in business operations.